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39 1997

TAXES CONSOLIDATION ACT, 1997

CHAPTER 2

Additional matters to be treated as distributions, charges to tax in respect of certain loans and surcharges on certain undistributed income

Certain expenses for participators and associates.

[CTA76 s96]

436. —(1) Subject to the exceptions mentioned in section 130 , “distribution”, in relation to a close company, includes, unless otherwise stated, any such amount as is required to be treated as a distribution by subsection (3).

(2) For the purposes of this section, any reference to a participator includes an associate of a participator, and any participator in a company which controls another company shall be treated as being also a participator in that other company.

(3) (a) Subject to paragraph (b), where a close company incurs expense in or in connection with the provision for any participator of living or other accommodation, entertainment, domestic or other services, or other benefits or facilities of whatever nature, the company shall be treated as making a distribution to such participator of an amount equal to so much of that expense as is not made good to the company by such participator.

(b) Paragraph (a) shall not apply to expense incurred in or in connection with the provision of benefits or facilities for a person to whom section 118 applies as a director or employee of the company, or the provision for the spouse, children or dependants of any such person of any pension, annuity, lump sum, gratuity or other like benefit to be given on his or her death or retirement.

(4) Any reference in subsection (3) to expense incurred in or in connection with any matter shall include a reference to a proper proportion of any expense incurred partly in or in connection with that matter, and section 119 shall apply for the purposes of subsection (3) as it applies for the purposes of section 118 , references to subsection (3) being substituted for references to section 118 (1).

(5) Subsection (3) shall not apply if the company and the participator are both resident in the State and—

(a) one is a subsidiary of the other or both are subsidiaries of a third company also so resident, and

(b) the benefit to the participator arises on or in connection with the transfer of assets or liabilities by the company to the participator, or to the company by the participator.

(6) The question whether one company is a subsidiary of another company for the purpose of subsection (5) shall be determined as if it were a question whether it is a 51 per cent subsidiary of the other company, except that the other company shall be treated as not being the owner of—

(a) any share capital which it owns directly in a company if a profit on a sale of the shares would be treated as a trading receipt of its trade,

(b) any share capital which it owns indirectly and which is owned directly by a company for which a profit on the sale of the shares would be a trading receipt, or

(c) any share capital which it owns directly or indirectly in a company not resident in the State.

(7) (a) Where each of 2 or more close companies makes a payment to a person (in this paragraph referred to as “the first-mentioned person”) who is not a participator in that company, but is a participator in another of those companies, and the companies are acting in concert or under arrangements made by any person, then, each of those companies and any participator in it shall be treated as if the payment made to the first-mentioned person had been made by that company.

(b) This subsection shall apply with any necessary modifications in relation to the giving of any consideration and to the provision of any facilities as it applies in relation to the making of a payment.

Interest paid to directors and directors' associates.

[CTA76 s97]

437. —(1) In this section, “interest” includes any other consideration paid or given by the close company for the use of money advanced, or credit given, by any person, and references to interest paid shall be construed accordingly.

(2) For the purposes of this section, a person shall have a material interest in a company if the person, either on the person's own or with any one or more of the person's associates, or if any associate of the person with or without any such other associates, is the beneficial owner of, or is able, directly or through the medium of other companies or by any other indirect means, to control, more than 5 per cent of the ordinary share capital of the company.

(3) Subject to the exceptions mentioned in section 130 (1), this section shall apply where in any accounting period any interest is paid by a close company to, or to an associate of, a person—

(a) who is a director of the close company, or of any company which controls or is controlled by the close company, and

(b) who has a material interest—

(i) in the close company, or

(ii) where the close company is controlled by another company, in that other company.

(4) Where the total amount so paid to any person in the accounting period exceeds the limit imposed in that person's case, the excess shall be deemed to be a distribution made by the close company to that person.

(5) The limit shall be calculated in the first instance as an overall limit applying to the aggregate of all interest which is within subsection (3) and which was paid by the close company in the accounting period and, where there are 2 or more different recipients, that overall limit shall be apportioned between them according to the amounts of interest paid to them respectively.

(6) The overall limit shall be a sum equal to interest at 13 per cent per annum or such other rate of interest as the Minister for Finance may from time to time prescribe on whichever is the lesser of—

(a) the total of the loans, advances and credits on which the interest within subsection (3) was paid by the close company in the accounting period or, if the total was different at different times in the accounting period, the average total over the accounting period, and

(b) the nominal amount of the issued share capital of the close company plus the amount of any share premium account (or other comparable account by whatever name called) of the company, taking both amounts as at the beginning of the accounting period.

(7) This section shall apply subject to section 436 (7).

Loans to participators, etc.

[CTA76 s98(1) to (7) and (9); FA83 s35]

438. —(1) (a) Subject to this section, where a close company, otherwise than in the ordinary course of a business carried on by it which includes the lending of money, makes any loan or advances any money to an individual who is a participator in the company or an associate of a participator, the company shall be deemed for the purposes of this section to have paid in the year of assessment in which the loan or advance is made an annual payment of an amount which, after deduction of income tax at the standard rate for the year of assessment in which the loan or advance is made, is equal to the amount of the loan or advance.

(b) Section 239 shall apply for the purposes of the charge, assessment and recovery of the tax referred to in paragraph (a).

(c) The annual payment referred to in paragraph (a) shall not be a charge on the company's income within the meaning of section 243 .

(2) For the purposes of this section, the cases in which a close company is to be regarded as making a loan to any person shall include a case where—

(a) that person incurs a debt to the close company, or

(b) a debt due from that person to a third person is assigned to the close company,

and in such a case the close company shall be regarded as making a loan of an amount equal to the debt; but paragraph (a) shall not apply to a debt incurred for the supply by the close company of goods or services in the ordinary course of its trade or business unless the period of credit given exceeds 6 months or is longer than that normally given to the company's customers.

(3) Subsection (1) shall not apply to a loan made to a director or employee of a close company, or of an associated company of the close company, if—

(a) the amount of the loan, or that amount when taken together with any other outstanding loans which were made by the close company or any of its associated companies to the borrower, or to the spouse of the borrower, does not exceed £15,000,

(b) the borrower works full-time for the close company or any of its associated companies, and

(c) the borrower does not have a material interest in the close company or in any associated company of the close company but, if the borrower acquires such a material interest at a time when the whole or part of any such loan remains outstanding, the close company shall be regarded as making to the borrower at that time a loan of an amount equal to the sum outstanding.

(4) (a) Where, after a company has been assessed to tax under this section in respect of any loan or advance, the loan or advance or any part of it is repaid to the company, relief shall be given from that tax or a proportionate part of that tax by discharge or repayment.

(b) Relief under this subsection shall be given on a claim which shall be made within 10 years from the end of the year of assessment in which the repayment is made.

(5) Where under arrangements made by any person otherwise than in the ordinary course of a business carried on by that person—

(a) a close company makes a loan or advance which apart from this subsection does not give rise to any charge on the company under subsection (1), and

(b) some person other than the close company makes a payment or transfers property to, or releases or satisfies (in whole or in part) a liability of, an individual who is a participator in the company or an associate of a participator,

then, unless in respect of the matter referred to in paragraph (b) there is to be included in the total income of the participator or associate an amount not less than the loan or advance, this section shall apply as if the loan or advance had been made to the participator or associate.

(6) In subsections (1) and (5)(b), the references to an individual shall apply also to a company receiving the loan or advance in a fiduciary or representative capacity and to a company not resident in the State.

(7) For the purposes of this section, any participator in a company which controls another company shall be treated as being also a participator in that other company, and section 437 (2) shall apply for the purpose of determining whether a person has for the purpose of subsection (3) a material interest in a company.

(8) For the purposes of this section and in relation to any loan or advance made on or after the 23rd day of May, 1983, section 430 (1) shall apply as if paragraph (b) of that section were deleted.

Effect of release, etc. of debt in respect of loan under section 438 .

[CTA76 s99(1), (2) and (4)]

439. —(1) Subject to this section, where a company is assessed or liable to be assessed under section 438 in respect of a loan or advance and releases or writes off the whole or part of the debt in respect of the loan or advance, then—

(a) for the purpose of computing the total income of the person to whom the loan or advance was made, a sum equal to the amount so released or written off shall be treated as income received by such person after deduction of income tax by virtue of section 238 (at the standard rate for the year of assessment in which the whole or part of the debt was released or written off) from a corresponding gross amount,

(b) no repayment of income tax shall be made in respect of that income,

(c) notwithstanding paragraph (a), the income included by virtue of that paragraph in the total income of that person shall be treated for the purposes of sections 237 and 238 as not brought into charge to income tax, and

(d) for the purposes of section 59 (ii), any amount to be treated as income by virtue of paragraph (a) shall be treated as if income tax had been deducted from that amount at the standard rate for the year of assessment in which the whole or part of the debt was released or written off; but, where such amount (or the aggregate of such amounts if more than one) exceeds the amount of the individual's taxable income charged at the standard rate or the higher rate, the amount of the credit under section 59 (ii) in respect of the excess shall not, notwithstanding anything in section 59 , exceed the amount of the income tax, if any, charged on that excess.

(2) If the loan or advance referred to in subsection (1) was made to a person who has since died, or to trustees of a trust which has come to an end, this section, instead of applying to the person to whom it was made, shall apply to the person from whom the debt is due at the time of release or writing off (and accordingly, if it is due from such person as personal representative within the meaning of Chapter 1 of Part 32 , the amount treated as received by such person shall be, as regards the higher rate of tax, included for the purposes of that Chapter in the aggregate income of the estate), and subsection (1) shall apply accordingly with the necessary modifications.

(3) This section shall be construed together with section 438 .

Surcharge on undistributed investment and estate income.

[CTA76 s101; FA90 s47; FA97 s146(1) and Sch9 PtI par10(4)]

440. —(1) (a) Where for an accounting period of a close company the aggregate of the distributable investment income and the distributable estate income exceeds the distributions of the company for the accounting period, there shall be charged on the company an additional duty of corporation tax (in this section referred to as a “surcharge”) amounting to 20 per cent of the excess.

(b) Notwithstanding paragraph (a)

(i) a surcharge shall not be made on a company where the excess is equal to or less than the lesser of the following amounts—

(I) £500 or, if the accounting period is less than 12 months, £500 proportionately reduced, and

(II) where the company has one or more associated companies, £500 divided by one plus the number of those associated companies or, if the accounting period is less than 12 months, £500 proportionately reduced divided by one plus the number of those associated companies;

(ii) where the excess is greater than the lesser amount on which by virtue of subparagraph (i) a surcharge would not be made, the amount of the surcharge shall not be greater than a sum equal to 80 per cent of the amount by which the excess is greater than that lesser amount.

(2) Where the aggregate of—

(a) the accumulated undistributed income of the company at the end of the accounting period, and

(b) any amount which, on or after the 27th day of November, 1975, was transferred to capital reserves or was used to issue shares, stock or securities as paid up otherwise than for new consideration (within the meaning of section 135 ) or was otherwise used so as to reduce the amount referred to in paragraph (a),

is less than the excess referred to in subsection (1), that subsection shall apply as if the amount of that aggregate were substituted for the excess.

(3) In applying subsection (1) to any accounting period of a company, an associated company which has not carried on any trade or business at any time in that accounting period (or, if an associated company during part only of that accounting period, at any time in that part of that accounting period) shall be disregarded.

(4) In determining how many associated companies a company has in an accounting period or whether a company has an associated company in an accounting period, an associated company shall be counted even if it was an associated company for part only of the accounting period, and 2 or more associated companies shall be counted even if they were associated companies for different parts of the accounting period.

(5) Where any amount on which a surcharge is made on a company under this section is distributed, the tax credit in respect of the distribution shall, except where otherwise provided, be that provided for by section 136 .

(6) A surcharge made under this section on a company in respect of an accounting period (in this subsection referred to as “the first-mentioned accounting period”)—

(a) shall be charged on the company for the earliest accounting period which ends on or after a day which is 12 months after the end of the first-mentioned accounting period, and

(b) shall be treated as corporation tax chargeable for that accounting period;

but where there is no such accounting period so ending, the surcharge shall be charged for, and treated as corporation tax of, the accounting period in respect of which it is made.

(7) The provisions of the Corporation Tax Acts relating to—

(a) assessments to corporation tax,

(b) appeals against such assessments (including the rehearing of appeals and the statement of a case for the opinion of the High Court), and

(c) the collection and recovery of corporation tax,

shall apply in relation to a surcharge made under this section as they apply to corporation tax charged otherwise than under this section.

Surcharge on undistributed income of service companies.

[CTA76 s162(1) to (6); FA90 s48; FA95 s55(1); FA96 s52(1); FA97 s146(1) and Sch9 PtI par10(9)]

441. —(1) In this section, “service company” means, subject to subsection (2)

(a) a close company whose business consists of or includes the carrying on of a profession or the provision of professional services,

(b) a close company having or exercising an office or employment, or

(c) a close company whose business consists of or includes the provision of services or facilities of whatever nature to or for—

(i) a company within either of the categories referred to in paragraphs (a) and (b),

(ii) an individual who carries on a profession,

(iii) a partnership which carries on a profession,

(iv) a person who has or exercises an office or employment, or

(v) a person or partnership connected with any person or partnership referred to in subparagraphs (i) to (iv);

but the provision by a close company of services or facilities to or for a person or partnership not connected with the company shall be disregarded for the purposes of this paragraph.

(2) Where the principal part of a company's income which is chargeable to corporation tax under Cases I and II of Schedule D and Schedule E is not derived from—

(a) carrying on a profession,

(b) providing professional services,

(c) having or exercising an office or employment,

(d) providing services or facilities (other than providing services or facilities to or for a person or partnership not connected with the company) to or for any person or partnership referred to in subparagraphs (i) to (v) of subsection (1)(c), or

(e) any 2 or more of the activities specified in paragraphs (a) to (d),

the company shall be deemed not to be a service company.

(3) For the purposes of this section—

(a) a partnership shall be treated as connected with a company or individual (and a company or individual shall be treated as connected with a partnership) if any one of the partners in the partnership is connected with the company or individual, and

(b) a partnership shall be treated as connected with another partnership if any one of the partners in the partnership is connected with any one of the partners in the other partnership.

(4) (a) Where for an accounting period of a service company the aggregate of—

(i) 50 per cent of the distributable income, and

(ii) 50 per cent of the aggregate of the distributable investment income and the distributable estate income,

exceeds the distributions of the company for the accounting period, there shall be charged on the company an additional duty of corporation tax (in this section referred to as a “surcharge”) amounting to 15 per cent of the excess.

(b) Notwithstanding paragraph (a)

(i) a surcharge shall not be made on a company where the excess is equal to or less than the lesser of the following amounts—

(I) £500 or, if the accounting period is less than 12 months, £500 proportionately reduced, and

(II) where the company has one or more associated companies, £500 divided by one plus the number of those associated companies or, if the accounting period is less than 12 months, £500 proportionately reduced divided by one plus the number of those associated companies;

(ii) where the excess is greater than the lesser amount on which by virtue of subparagraph (i) a surcharge would not be made, the amount of the surcharge shall not be greater than a sum equal to 80 per cent of the amount by which the excess is greater than that lesser amount;

(iii) the surcharge shall apply to so much of the excess calculated under this subsection in respect of an accounting period of a company as is not greater than the excess of the aggregate of the distributable investment income and the distributable estate income of the accounting period over the distributions of the company for the accounting period as if the reference in this subsection apart from this subparagraph to 15 per cent were a reference to 20 per cent.

(5) Section 440 (1) shall not apply in relation to a service company, but subsections (2) to (7) of section 440 shall apply in relation to a surcharge made under this section as they apply in relation to a surcharge made under section 440 with the substitution in subsections (2) and (3) of section 440 of a reference to subsection (4) of this section for the reference to subsection (1) of that section.

(6) (a) Subsections (2), (3), (6) and (7) of section 434 shall apply for the purposes of this section as they apply for the purposes of section 434 or 440 , as the case may be.

(b) For the purposes of this section—

(i) the income of a company for an accounting period shall be its income computed for that period in accordance with section 434 (4);

(ii) “distributable income”, “distributable investment income” and “distributable estate income” of a company for an accounting period have the same meanings respectively as in subsections (1) and (5) of section 434 with the substitution for the reference to a trading company in each place where it occurs in subsection (5) of that section of a reference to a service company.